Macau Property Opportunities reflects on tough year – The value of Macau Property Opportunities’s (MPO) portfolio declined by 7.7% to US$311.1m, over the year to 30 June 2019. Reported figures for adjusted and IFRS NAV were down 17.0% and 23.7%, respectively.
Mark Huntley, chairman of MCO, said: “The past year has unquestionably been challenging. We are also aware of the Company’s time constraints and the expectations of our shareholders. We remain determined and pragmatic in our approach and have full confidence that the manager can complete the divestment process.
In the meantime, we are carefully conserving our resources by continuing to proactively lower our cost base wherever possible.”
We note that MPO is currently in the process of what it describes as an orderly and well-timed disposal of its remaining assets.
Anecdotes from chairman Mark Huntley’s note to shareholders
Government measures affecting the high-end property market
“Macau’s long-term growth appears assured, cemented by key projects including the Hong Kong-Zhuhai-Macau Bridge, a rapidly expanding regional railway network and a new wave of casino and hotel developments.
Nevertheless, and more important in context of performance, near term headwinds have continued to materially impact our divestment timetable and the delivery of our strategy.
While mass-market gaming and non-gaming activities continue to grow, the VIP gaming market, which is closely linked to high-end property, has slowed significantly. In addition, property speculation cooling measures in Macau and tighter capital controls in China have adversely affected higher value and multiple property ownership. This has resulted in very few high-end property transactions.
These two factors account largely for the 7.7% fall in appraised valuations over the year. Although valuations have slipped, the lack of comparable transactions should be noted, reflecting investor caution.
It remains to be seen whether the change of chief executive set to take place in Macau will support the property sector and relax current measures, potentially breathing life into a stalled high-end market. In previous periods where the market has slowed, we have seen optimism turn rapidly into positive investment activity following a change of sentiment driven by economic or market specific events.”
External factors affecting the Macau market
“Developments in the US-China trade dispute have continued to weigh on investor sentiment, and its protracted nature has negatively affected initiatives to divest our portfolio.
The dispute has accompanied changes in mainland China’s economy, a weakening of the yuan, and a tightening of capital controls, the latter influencing both corporate and ultra-high-net-worth individuals’ investment decisions. More recently, however, we have seen some encouraging signs both in terms of economic stimulus and renewed negotiations between China and the US.
A positive consequence is that the company may benefit further from falling US interest rates, which, added to the excellent debt restructuring work by the manager, will ease our debt-servicing costs, our single largest expense.”
Investment objective and performance
“Our investment objective remains unchanged: the orderly, well-timed disposal of our remaining assets.
Since MPO’s inception, Sniper Capital – our manager and largest shareholder – has returned US$173m to shareholders in the form of share repurchases and distributions, equivalent to c. 91% of the capital raised at the company’s IPO.
However, despite concerted efforts, the sale of remaining assets has not been achieved in the anticipated timeframe. This is due to a sharp drop-off in transaction volumes in the high-end sector to which we are predominantly exposed.
I wish to assure investors that no complacency exists at either the board or manager level. Despite the challenging operating conditions, the manager has deployed a variety of tactics aimed at achieving our investment objectives. Our properties are high quality assets for which genuine investor interest remains, and we are making a determined effort to convert that into meaningful offers.
Macau remains a very tight property market so information relating to strategy must be carefully managed. However, following the exclusive appointments of international agents for The Waterside and Estrada da Penha in previous years, the manager has continued to broaden marketing channels and range of sales initiatives. The reconfiguration of larger units at The Fountainside to appeal to a new younger market is another example of a measure aimed at delivering sales amid a marked change in market circumstances.
The board is both supportive of this approach and the rationale of allowing more time to achieve a satisfactory outcome.”
Asset management
“In current market conditions, maintaining the assets in an attractive condition and delivering positive divestment outcomes is critical. All expenditure is carefully considered, ensuring that each property will appeal to target buyers and that such expenditure is properly justified.
At The Waterside, tenancy levels have been managed well amid shifting demand and the tower retains its position as one of Macau’s premier addresses.
At The Fountainside, the sale of one unit post-financial year-end was a direct result of new incentives. The other key initiative is the conversion of larger units into smaller, more affordable apartments less affected by cooling measures and mortgage threshold restrictions.
Estrada da Penha continues to attract viewings by prospective investors and we are responding to their comments by further enhancing the property’s appeal in this demanding ultra-luxury market segment.”
The way forward
“The manager remains focused on divestment of our remaining assets, working through difficult current conditions via a multi-channel approach.
A recent achievement has been the successful renegotiation of our debt finance terms. A 40 basis point reduction has been negotiated in the interest rate for our largest facility.
Our balance sheet and consolidated cash balance will continue to be carefully monitored as we seek to divest assets.”
MPO: Macau Property Opportunities reflects on tough year